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11 Dec 2015
ZAR: Rand plunge serves as a reminder of potential volatility to come - MUFG
FXStreet (Delhi) – Derek Halpenny, European Head of GMR at MUFG, suggests that the plunge of the South African rand by 6.7% from the low on Wednesday to yesterday’s high should serve as a reminder that deteriorating domestic factors in circumstances of the Fed beginning to raise rates can be a nasty recipe for a currency.
Key Quotes
“S&P and Fitch both have South Africa one notch above junk status and hence the rand is set to remain vulnerable to investor capital flight. The renminbi is also weakening notably. CNH remains below its intra-day low but USD/CNY is now trading above the intra-day high following the devaluation in August. That move will put further downward pressure on Asian currencies generally.”
“It is also worth monitoring Argentina. President Mauricio Macri was sworn in yesterday and one of his election pledges was to allow for greater flexibility of the peso. That could be one of his first steps as president and could mean a sharp devaluation of the peso over the coming days – our year-end USD/ARS forecast of 12.500, some 28% higher than the current spot. The move at some point is widely expected but it may still have some implications for LATAM currencies over the short-term.”
“Finally oil related currencies remain vulnerable to further weakness versus the dollar. The plunge in crude oil prices below the USD 40 level has encouraged renewed selling. Russia surely remains one of the more vulnerable countries to the continued slide. It’s decision to launch airstrikes in Syria means the fiscal squeeze could intensify far more quickly than originally expected.”
“The Treasury in Russia has just released budget projection scenarios with the baseline assumption being that crude oil will average USD 50 per barrel next year. The risks are perhaps to the downside on that and the rising cost of war in Syria could mean deeper fiscal consolidation will be required. If something gives it is most likely to be the rouble. There had been speculation of a further rate cut in Russia today but inflation concerns (food embargo from Turkey to lift food inflation) has seen the consensus shift back to no change.”
Key Quotes
“S&P and Fitch both have South Africa one notch above junk status and hence the rand is set to remain vulnerable to investor capital flight. The renminbi is also weakening notably. CNH remains below its intra-day low but USD/CNY is now trading above the intra-day high following the devaluation in August. That move will put further downward pressure on Asian currencies generally.”
“It is also worth monitoring Argentina. President Mauricio Macri was sworn in yesterday and one of his election pledges was to allow for greater flexibility of the peso. That could be one of his first steps as president and could mean a sharp devaluation of the peso over the coming days – our year-end USD/ARS forecast of 12.500, some 28% higher than the current spot. The move at some point is widely expected but it may still have some implications for LATAM currencies over the short-term.”
“Finally oil related currencies remain vulnerable to further weakness versus the dollar. The plunge in crude oil prices below the USD 40 level has encouraged renewed selling. Russia surely remains one of the more vulnerable countries to the continued slide. It’s decision to launch airstrikes in Syria means the fiscal squeeze could intensify far more quickly than originally expected.”
“The Treasury in Russia has just released budget projection scenarios with the baseline assumption being that crude oil will average USD 50 per barrel next year. The risks are perhaps to the downside on that and the rising cost of war in Syria could mean deeper fiscal consolidation will be required. If something gives it is most likely to be the rouble. There had been speculation of a further rate cut in Russia today but inflation concerns (food embargo from Turkey to lift food inflation) has seen the consensus shift back to no change.”